Gordon Rees Scully Mansukhani Partner Nosizi Ralephata, Partner Vic Rawl, and Associate Julie Fekete recently obtained a significant win in the South Carolina Court of Appeals on behalf of their client, a medical professional provider.
The lawsuit arose from two class action complaints, which were consolidated for the appeal. The plaintiffs were insured patients who sought medical treatment at emergency rooms in South Carolina, staffed by the medical professional provider. The provider had contracted with the patients’ insurers to accept negotiated rates for services. The insured plaintiffs alleged that the provider billed them directly at higher rates than allowed, breaching the contracts between the insurers and the provider. They sought to enforce the contracts as third-party beneficiaries or, alternatively, under an unjust enrichment theory. Notably, the insured/provider contracts included an arbitration provision. However, the plaintiffs sought damages for breach of those contracts while simultaneously attempting to avoid the arbitration provision.
The circuit court found that the insured plaintiffs’ purported lack of knowledge of the arbitration clause at the time of receiving medical treatment allowed them to avoid the arbitration provisions, leading to a denial of the provider’s motions to compel arbitration. The Court of Appeals disagreed, clarifying that the relevant analysis hinges on whether the plaintiffs were aware of the insured/provider contracts when they filed their complaints and whether they were seeking to enforce other provisions within those contracts. Consequently, the Court of Appeals reversed the circuit court's decision and remanded the case for orders compelling arbitration between the provider and the insured plaintiffs, acting as third-party beneficiaries to the relevant contract.
This win clarifies an important legal standard in South Carolina regarding the enforceability of arbitration agreements against third-party beneficiaries and illuminates the application of equitable estoppel in this context. Specifically, the opinion confirms that South Carolina acknowledges direct benefits estoppel, which prevents a nonsignatory third-party beneficiary from simultaneously seeking contractual benefits while evading the arbitration provision contained within the same contract.
Notably, the Court of Appeals cited significant Fourth Circuit case law (International Paper Co., 206 F.3d 411 (2000)), establishing that the plaintiffs’ claims arise solely from the terms of the contracts. This means that equity prevents the nonsignatory third-party plaintiffs from avoiding the arbitration provision that is part of the contract. By signaling support for this broader body of law, South Carolina clients may see improved outcomes when enforcing their arbitration provisions in the future.
Contact a member of GRSM’s Commercial Litigation practice group to discuss how these developments may impact your business contracts.